China Researcher Says Hot Money Adds to Yuan Pressure

April 20 (Bloomberg) -- The Chinese yuan is set to
strengthen as rising inflows of speculative capital add to
pressure on the currency, the head of a Ministry of Commerce
research institute said.

“Hot money is flowing into China, and that will push up
the yuan exchange rate,” Huo Jianguo, president of the Chinese
Academy of International Trade and Economic Cooperation under
the ministry, said in an interview in Beijing yesterday.

The yuan had its biggest weekly gain in six months after
People’s Bank of China Deputy Governor Yi Gang said the daily
trading band that’s been limiting appreciation against the U.S.
dollar since October may be widened. The largest jump in
foreign-exchange reserves in almost two years in the first
quarter adds to signs capital inflows are increasing.

“China’s situation is exactly the opposite” of Japan’s,
said Huo, who previously worked as a trade official in the
commerce ministry. The yen is expected to continue weakening
amid the Bank of Japan’s policy easing, Huo said, estimating the
currency could drop to 110 per dollar this year.

The yen has dropped almost 20 percent since mid-November,
when the election which brought Prime Minister Shinzo Abe to
power was announced. He won on a platform of unlimited monetary
easing to end more than a decade of deflation.

Testing Band

Yi commented on widening the yuan’s trading band on April
17 in Washington, where he was attending an International
Monetary Fund conference, ahead of a two-day meeting of finance
ministers and central bank governors from Group of 20 nations
that ended yesterday.

The PBOC allows the yuan to fluctuate against the U.S.
dollar by as much as 1 percent either side of a daily reference
rate. The currency has been within 0.1 percent of the upper end
of its permitted trading range most days since October. The spot
rate yesterday was 1 percent stronger than the PBOC fixing.

The yuan, also known as the renminbi, has appreciated 0.9
percent this year, reaching a 19-year high of 6.1723 per dollar
on April 17, according to China Foreign Exchange Trade System
prices. The currency gained 0.24 percent this week to close at
6.1776 per dollar in Shanghai.

Direct trading between the yuan and the Australian dollar
that started this month may also help to boost demand and
confidence in the currency, Huo said.

HSBC Holdings Plc raised its estimate for yuan appreciation
this year after stronger-than-expected gains in the first
quarter, according to an April 17 report. The bank now sees the
yuan trading at 6.14 per dollar by the end of the year, up from
a previous estimate of 6.18, a full-year gain of around 1.5
percent.

Too Fast

The PBOC has “shown increasing tolerance” of a stronger
yuan to help promote “internationalization” of the currency,
analysts led by Paul Mackel, head of Asian currency research in
Hong Kong, said in the HSBC report.

“The yuan’s appreciation recently has been a bit too
fast,” Zhang Yongjun, an economist with the government-backed
China Center for International Economic Exchanges, said at a
forum in Beijing yesterday. So-called hot money may be flowing
into China under the guise of exports due to expectations the
currency will strengthen, he said.

Rapid yuan gains “have already inflicted pain on our
exporters,” said Zhang, who previously worked at the State
Information Center, which is affiliated with the National
Development and Reform Commission. “If we slow the pace of
gains appropriately by taking some appropriate controls, it
would benefit our exports.”

More Bullish

China’s foreign-exchange reserves, the world’s biggest at
$3.44 trillion, jumped $128 billion in the first quarter from
end-December. The central bank and financial institutions bought
a record 684 billion yuan of foreign currency from customers in
January and 295 billion yuan in February, indicating higher
capital inflows.

Since the third quarter, “the private sector has turned
more bullish” on the yuan, HSBC said. “Strong inflow pressures
are likely to soften in the rest of” the second quarter “but
we expect the RMB to stay resilient,” they wrote.